'We're first' claim often last thing to be believed

STAYING AHEAD

New York -- The proliferation of mutual-fund ads shouting "We're No. 1" should raise a healthy doubt in the mind of every investor.

Some of these funds are indeed tops, as that word is normally understood: the best performer among a large number of funds, over a reasonable period of time. Other funds find their "1" position by choosing cleverly among narrow fund categories or picking lucky 30-day time periods.

Experienced investors know that these ads are probably fluff. The inexperienced, however, might be misled. The Investment Company Institute, a mutual-fund trade group, has proposed corrective guidelines that would clean up at least some of the problems.

4 Here are some of the "1" ads you've been seeing:

* The Pilgrim Group. In January and February, it ran ads bragging that, in the 1992 mutual-fund sweepstakes, the Pilgrim Group held slots 1 through 5, as ranked by Lipper Analytical Services. The fine print said only that each fund achieved its ranking "in its category," without defining the categories.

Morningstar Mutual Funds, a Chicago publication, published a stinging critique of the ad, charging that it falsely suggested that "Pilgrim dominated the fund charts this past year." Morningstar said, in fact, "none of Pilgrim's open-end mutual funds even placed in the top 100 of all funds." The advertised rankings came from three unrelated categories in which certain Pilgrim funds were competitive.

Pilgrim responded to the criticism with a libel suit charging, among other things, that Morningstar made it appear that Pilgrim had arbitrarily devised the rankings, without mentioning that they had come from Lipper. Responds Morningstar publisher Don Phillips, "They haven't been able to point to one thing in [the article] that's false."

Pilgrim declined further comment.

Had the ICI's guidelines been in effect, Pilgrim would have made several of the disclosures that Phillips called for. In a subsequent ad that did follow the proposed guidelines, Pilgrim specified the category it was using for comparison and how many mutual funds it contained.

* The Dreyfus Intermediate Municipal Bond Fund. Earlier this month, it advertised itself as having been "one of the highest-yielding" funds in its category. The claim was based on 30-day January data. Back then, this fund ranked fourth in yield, Lipper says. By the end of May, however, Lipper ranked it No. 11 out of 53 funds. Dreyfus' Diane Coffey told my associate, Amy Eskind, that using January figures was a mistake; virtually identical ads run at the same time footnoted May figures, then the most current. Coffey says the fund is still "one of the highest yielders" because it's in the top 25 percent.

* The Kaufmann Fund. It touts itself as the No. 1 "growth fund" from both the market peak and market low of 1987, through September 1992. Its more recent data isn't as impressive. For calendar year 1992, Kaufmann ranked 72nd out of 120 small-company growth funds, Lipper says.

* The Neuberger & Berman Guardian Fund. This ad finds Guardian No. 1 for various periods ranging up to 30 years. The fine print discloses that it compared itself only with a few other funds of a certain size -- something ICI guidelines would prohibit. The ad's large print also skipped periods when the fund wasn't first.